The Bank of Canada (BoC) cut the policy rate by 25 basis points to 4.75 per cent on Wednesday, while the Reserve Bank (RBA) found itself in an unadmirable position after the latest GDP data revealed sluggish growth.
In announcing the rate cut, Bank of Canada governor Tiff Macklem said: “If the economy continues to evolve broadly as we had expected, if we continue to see inflation pressures easing, it is reasonable to expect that there will be further cuts in interest rates.”
The European Central Bank (ECB) is still expected to be the next cab off the rank, with a forecast June rate cut, while the Federal Reserve is, according to analysts, engaged in a wrestle with a fiscal policy that frustrates its inflation containment objective.
For the RBA, this week has not been an easy one. Namely, the Australian Bureau of Statistics revealed on Wednesday that GDP in the March quarter delivered the slowest rate of annual growth in three decades.
And while most economists agreed that “Australia does not need higher rates”, they also acknowledged that rates would likely remain higher for longer.
Stephen Miller, GSFM investment strategist on global central banks including the RBA, said the productivity and unit labour cost growth measures revealed by ABS’ release will not dissuade the central bank from abandoning its current tolerance of a slower return of inflation in order to preserve as much of the labour market gains as possible.
“That means there is little prospect of a change in the policy rate at the RBA board meeting on 17–18 June and little prospect of a change in messaging from the ‘not ruling anything in or ruling anything out’ mantra that the governor has adopted,” Miller said.
Moreover, he said, “such messaging remains appropriate given the narrowness of the path”.
“Were, however, there to be a further upside surprise in the June quarter inflation numbers so that RBA’s trimmed-mean consumer price index inflation forecast of 3.8 per cent is exceeded, then the 5–6 August RBA board meeting may well have to consider increasing the policy rate further given the board’s ‘limited tolerance for inflation returning to target later than 2026’,” Miller said.
“My best guess – and it is just a guess – is that a further hike is unlikely given the likelihood that underlying weakness in activity growth will show through in a weaker labour market and allow a more confident projection of inflation declining toward target.”
However, he deemed an extended pause in any policy rate adjustment until the RBA is convinced that its current trajectory for the return of inflation to target is secure as the most likely scenario.
“That argues for a policy rate cut toward the end of the year or sometime in the first half of 2025.”
Speaking before the Senate economics committee on Wednesday, RBA governor Michele Bullock said the bank would remain “data driven”, meaning it intends to maintain its neutral stance in anticipation of the next instalment of quarterly inflation data.
But, she cautioned that a rebound in inflation would prompt the bank to raise interest rates again.
“If it turns out that inflation starts to go up again or it’s much stickier than we think, we’re not getting it down, then we won’t hesitate to move and raise interest rates again,” Bullock said.
Conversely, weaker-than-anticipated data would compel the RBA to cut rates.
“In contrast, if it turns out that the economy is much weaker than expected then that puts more downward pressure on inflation, then we’ll be looking to ease.”
The RBA will next announce its cash rate decision on 18 June.
